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Kerry Schott calls out AGL Energy's market power under NEG

Kerry Schott calls out AGL Energy's market power under NEG

Regulatory risks around AGL Energy have intensified after Energy Security Board chairman Kerry Schott highlighted concerns the utility would have too
much market power in South Australia under the proposed National Energy Guarantee system.

Ms Schott said effective competition was a prerequisite for the NEG to work. She said that while there was enough competition in most states, a "careful"
approach would be needed in South Australia because the electricity supply sector there was dominated by one company: AGL.

The market power of all three major electricity suppliers – AGL, Origin Energy and EnergyAustralia – is an issue of which the ESB is "well aware,"
Ms Schott said on a stakeholder webinar on Friday, adding it would be discussed at the Council of Australian Governments meeting to consider the
NEG.

JPMorgan energy analyst Mark Busuttil has also suggested the NEG policy would provide additional power to the major combined generator-retailers,
notably AGL and Origin. He said the NEG would encourage retailers to own generation assets.

But an AGL spokesman pointed to findings by the Australian Energy Market Commission that retail markets with the highest level of vertical integration
were the most competitive, and research by Frontier Economics that power producers that own retail operations behave more competitively than stand-alone
generators.

"We are happy to work with the Energy Security Board to address any concerns it has but believe increased electricity supply rather than increased
regulation is the best way to ease cost pressure on customers," the spokesman said.

The NEG, intended to address the "trilemma" of reliability, affordability and sustainability of energy supply, places an obligation on electricity
retailers to source minimum levels of power from dispatchable sources, with supplies also to be in line with Australia's Paris commitments to cut
carbon emissions.

Ms Schott's comments also come as risks are rising in Victoria and Queensland that governments will intervene to regulate or control retail prices
to try to rein in prices.

The surge in AGL's share price, to a record $28.44 in April, was brought to a halt by worries about mounting regulatory risks. The shares closed at
$25.30 on Friday.

In Queensland, where AGL has a major retail presence, the Palaszczuk government has charged the Queensland Competition Authority to monitor retailers'
pricing on a quarterly basis and has reserved the right to intervene if necessary. The QCA is studying the bills paid by households in the deregulated
market in the state's south-east, where price controls were scrapped in mid-2016, and comparing them with the regulated market in regional and
rural areas.

The QCA is due to respond to the ministerial order by November 24, the day before the state election, with a report due on November 27.

RBC Capital Markets utilities analyst Paul Johnston said he saw the move as "further evidence of regulatory and policy risk, particularly for retailers
with the state government [retaining] an ability to intervene and potentially reregulate retail energy prices".

He suggested that if the comparisons show a large divergence in prices, in particular with standing offers, "this may lead to further intervention
in the market".

"This will also depend on the outcome of the state election with intervention of this nature considered more likely by the incumbent Labor government
versus an LNP-led government," Mr Johnston said.